Disconnect widens between base rates and LIBOR

WTF?_2

Are central bank interest rates even relevant as a tool, any more?

http://www.bbc.co.uk/blogs/thereporters/robertpeston/2008/11/how_much_should_banks_cut_rate.html

A traditional proxy for their average cost of money has been the three-month Libor rate, which is what banks pay for unsecured loans from other banks of three-month duration.
However, there is controversy over whether that rate is quite as accurate a measure of the genuine cost of funds as it once was.
But, for what it's worth, those who operate in the market believe that three-month Libor will fix at just under 5% this morning.
Which would mean that the Bank of England's 1.5 percentage point cut had reduced the cost of money for banks by around 0.75 of a percentage point, perhaps a tiny bit more.
There is therefore an argument that mortgage rates and loans to businesses should be reduced by at least 0.75%.

So the spread between real world and politically set rates has just increased by another 0.75%.

You have to wonder if base rates can be considered an effective tool for economic management any more, which leaves the MPC where?

Really2

!!!!!!? wrote: »

Are central bank interest rates even relevant as a tool, any more?

http://www.bbc.co.uk/blogs/thereporters/robertpeston/2008/11/how_much_should_banks_cut_rate.html

So the spread between real world and politically set rates has just increased by another 0.75%.

You have to wonder if base rates can be considered an effective tool for economic management any more, which leaves the MPC where?

It will take days or weeks. If the cuts are passed on to the customers libor will have to come down.:rolleyes:

kennyboy66_2

!!!!!!? wrote: »

Are central bank interest rates even relevant as a tool, any more?

So the spread between real world and politically set rates has just increased by another 0.75%.

You have to wonder if base rates can be considered an effective tool for economic management any more, which leaves the MPC where?

It leaves then in the position where they have just reduced "real" interest rates by 0.75%, without the pound going into freefall.

Martin Wolf (associate editor) in the FT called for a 2% rate reduction last week for exactly this reason.

The MPC have probably done just the right thing.

Could be a masterstroke*




* or could be a huge blunder. We shall see.

purch

You have to wonder if base rates can be considered an effective tool for economic management any more, which leaves the MPC where?

Hasn't this been covered on other threads ??

In fact I am sure I was typing something very similar yesterday...

Base Rates have never been an effective tool for anything....but it's just about all they have, so they try to make everyone believe they can influence matters.

Generali

LIBOR fixings for the day:

3 month GBP LIBOR was 5.56% now 4.50%
1 month GBP LIBOR was 5.28% now 4.08%
Ovrnight GBP LIBOR was 4.00% now 3.21%

150 basis points (1.50%) above base rate for 3 month LIBOR. That's very, very high but in line with what has been happening recently. That probably equates to more like 200 odd bps (2.00%) over base rate as it will be pricing in future base rate cuts.

Base rate market forcasts (with thanks to Globalarbtrader):

http://boards.fool.co.uk/Message.asp?mid=11304806

November 3.0%
December 2.5%

2009
January 2.25%
February 2.0% (minimum)
(there is a 20% chance of a further cut, which if it happens will be reversed by...)
October 2.0%
2010
January 2.25%
April 2.5%
June 2.75%
August 3.0%
December 3.25%
2011
February 3.5%
September 3.75%
2012
January 4.0%
April 4.25%
July 4.5%
2013
January 4.75%
August 5.0%
2014
May 5.25%
2015
May 5.5%

mitchaa

Generali wrote: »

LIBOR fixings for the day:

3 month GBP LIBOR was 5.56% now 4.50%
1 month GBP LIBOR was 5.28% now 4.08%
Ovrnight GBP LIBOR was 4.00% now 3.21%

As someone who knows very little about the banking system, would you care to explain why there are various rates for the same thing? I suppose a quick google is all that is needed but seeing as you are normally quite helpful, well...

Are banks now lending to each other @ 3.21% or @ 4.5%? What do the overnight/1/3mth indicate?

Jonbvn

So are we looking at new fixed rates mtgs at 4.5%?

Really2

mitchaa wrote: »

As someone who knows very little about the banking system, would you care to explain why there are various rates for the same thing?

Are banks now lending to each other @ 3.21% or @ 4.5%? What do the overnight/1/3mth indicate?

3 month is usualy the basis for motgage rates I know that much. (I think )

But they are all the interest rate for lending money for that legnth of time to each other arn't they.
But i presume each one as very effects but gens your man for that defo.

purch

What do the overnight/1/3mth indicate?

In the Interbank wholesale market Banks lend and Borrow from each other all along the yield curve.

OverNight is from Today until Tomorrow
TomNext is Tomorrow until the Spot Date (which is 2 days away)
1 month (Domestic) is from Today for 1 Calender Month (8th Dec)
1 month (Euro) is from Spot until 1 Calender Month (11th Nov to 11th Dec)

and so on for each period

LIBOR's are set by the BBA (using a panel of trading Banks) every day for set periods.

The periods are from SpotNext [ 1 day ] (sometimes incorrectly referred to as Overnight) , 1 Week, 2 Weeks, 1 month out to 12 months.

The rates are Euro which means the start date is always 2 days hence, and the interest is calculated on a 360 day year basis.

The Bank of England Base Rate is used by the Bank for it's market operations, which are always done on a Domestic basis where interest is calculated on a 365 day basis (except leap years).

3 month is usualy the basis for motgage rates

I don't think that is correct.

Generali

mitchaa wrote: »

As someone who knows very little about the banking system, would you care to explain why there are various rates for the same thing? I suppose a quick google is all that is needed but seeing as you are normally quite helpful, well...

Are banks now lending to each other @ 3.21% or @ 4.5%? What do the overnight/1/3mth indicate?

To translate, it means that the average* rate of interest charged this morning for one bank to borrow money unsecured from another for 3 months was 4.50% (aka 3 month LIBOR), for 1 month was 4.08% and overnight was 3.21%.

Those are annualised percentage rates so if borrowing for 1 month the actual rate is 30/365ths of 4.08%.

The 'spread' (in other words the difference between the base rate and LIBOR) is a reflection of how risky banks feel it is to lend to each other. This spread should be 0.25-0.50% on average. It is currently a lot higher than that. Mortgage lending to some extent will be financed using 3 month LIBOR. Fixed rates are hedged using something called an interest rate swap so the price of those will impact on the cost of a fixed rate mortgage too.

*It's slightly more complicated than an average but it's close enough to think of it like that.

Mark-W_2

Another misleading article, as stated the 'widening' was only for 24hrs due to the lag in boe decision and the next libor rate being set, not even news worthy.

The fact the the libor dropped over night is news worthy, however i doubt very much it will make the 6 or 9 oclock news tonight, which is odd as when it went up .25% it was the end of the world according to bbc/itv.

Thanks generali for clearing things up for those who have no idea how the system works... not mentioning any names :rotfl:

the libor rate wil continue to drop in the coming weeks, and months just as it has doen since the bail out, although its seldom reported.